For the past 15 years, the US Federal Reserve has maintained a “see no evil” policy on asset bubbles–they said they couldn’t see them building, so not possible to avoid them. But this time around, 5 years after the credit bubble burst so horribly, Fed efforts to mop up the mess have now left its own financial stability in jeopardy. This is not a Fed who can view markets dispassionately from the side lines, this is a Fed who has tripled its own balance sheet to absorb trillions in over-priced bonds over the past 3 years. This time the Fed itself is at risk of “significant capital losses when these holdings are unwound” (as acknowledged in the Fed minutes yesterday). Now at last the Fed has a very personal reason to predict and manage the risk of asset bubbles. Perhaps even where this requires withdrawing liquidity from a slumping economy.
WSJ’s Global Economics Editor David Wessel and Chief Economics Correspondent Jon Hilsenrath (aka Bernanke’s mouth) discuss the Federal Reserve’s newest concern: The danger that its easy money policies may fuel another financial crisis.Here is a direct link.
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